CH 24 - Incorporation

Question 1

How P&M disposal value is established ;
* with/without a consideration paid &
* under joint election?

Answer 1

With consideration paid;
The disposal value is lower of:
* cost; and
* actual consideration

Without consideration paid;
The disposal value is lower of;
* MV at the date of transfer; and
* cost.

Under joing election (s.266, CAA 2001), P&M is trf at TWDV to avoid balancing charge on cessation

No annual investment allowance or first-year allowances are available to the company as
the assets are acquired from a connected person.

Question 2

What happens to SBA on incorporation?

Answer 2

On transfer the company will be able to claim the same SBA over reamining of 33 1/3-year period.

Question 3

How stok is transferred on Incorporation?

Answer 3

Stock is deemed to be sold to the company at MV.

However, where stock is transferred between connected persons, the two parties may elect for the stock to be treated as transferred for the higher of:
* * its acquisition value; or
* * the amount the stock was actually sold for.

This election is only possible where both the acquisition value and the actual selling price are less than MV of the stock.

Question 4

What can we do with sole trade losses preior to incorporation?

Answer 4

• set against current or previous year (s.64 ITA 2007)
• set against gains (s.71 ITA 2007) after s.64 is made
• set against profit of the final tax year and previous 3 tax years (LIFO, ss.89 & 90 ITA 2007)
• set against salary or dividends from the company (s.86 ITA 2007)

Question 5

What do you know about Incorporation Relief?

Answer 5

Incroporation relief = defferal of gain by rolling it to the base cost of individual’s shares in the company

To obtain the relief, all assets of the sole trader (except cash) must be transferred to the company.

Incorporation relief is automatic, however can be dissaplied (s.162A TCGA 1992), by 2nd aniversary of 31 January following the tax year following the tax year of incorporation.
(if sold by the end of tax year following incorproation, deadline is 1st aniversary of 31 jan.)

Question 6

What is considered as potential alternative to Incorporation Relief?

Answer 6

Gift Relief claim (s.165, TCGA 1992)
(gain is rolled against the base cost of asset not the shares)

Question 7

Is VAT due on transfer of a business to a company?

Answer 7

No VAT needs to be charged, as the incorporation will be a transfer of a going concern (TOGC).

Question 8

Is there Inheritance tax due on incorporation?

Answer 8

There is no inheritance tax (IHT) on incorporation as there is no ‘loss to donor’ on the transfer of assets.

Question 9

What BPR can be available?

Answer 9

Business property relief (BPR) is available at 100% on the shares in the unlisted trading company.

& only available at 50% on buildings owned personally by an individual but used by a company he controls.

Question 10

What tax arrises on transfer of land & buildings to a newly incorporated company?

Answer 10

Stamp duty land tax (SDLT) will be payable on a transfer of land and buildings

If, however, the land and buildings are kept outside the company to avoid SDLT, this will deny s.162 relief.

Question 11

List ways funds can be extracted from the company;

Answer 11

• Salary/Bonus (income tax, Class 1 NIC primary & secondary)
• Dividends (income tax, NO NICs, NO CT relief)
• Rent (Income tax, No NIC’s, but CT relief on accrual basis)
• Interest (Income tax, NO NICS’s, CT relief on accrual basis)
• Pension contributions (No Income tax, NO NICs, CT relief on paid contr.)